Land values full circle?

Jim Rutledge says he's been in business long enough to see that three things his father told him would always be true about farmland that the younger Rutledge had decided were not have become operative again.

If you didn't quite get all of that, it's possible you didn't live through the farm real estate bust of the 1980s when farmland values went down along with parts of the Farm Credit System and other farm institutions.

“My dad always told me three things were true about farmland: (1) They weren't making any more; (2) You can't pay too much for it; and (3) It would never lose value,” said Rutledge. “I had decided he was wrong in the late 1980s and early 1990s, and now I believe he really did know what he was talking about.”

Speaking at a meeting of the Agricultural Club of Memphis, Rutledge, president of Memphis-based Rutledge Investment Co., said that farmland values have decidedly turned up even though commodity prices, especially for cotton, have turned down.

“Conventional wisdom says that when commodity prices soften, land prices won't keep rising at the same rate they do in times of higher prices,” he said. “But that's not what's occurring now for a variety of reasons.”

Since 1999, he said, USDA reports U.S. farmland values have risen by an average $60 per acre per year. For Arkansas and Mississippi, the average increase was $66 per acre; Louisiana, $35 an acre; and Missouri, $117 an acre.

“In 2003, the average price for farmland in Missouri was $1,600 per acre. In Arkansas, it was $1,470 per acre; and, in Mississippi and Louisiana, $1,360 an acre,” said Rutledge, whose company does appraisals and makes farm mortgage loans.

After a brief upturn last fall, commodity prices have again fallen with cotton suffering the most traumatic loss of more than 30 cents per pound since last October's peak of 82 cents on the New York Board of Trade.

A similar situation in the early 1980s — which saw cash soybean prices drop below $5 per bushel in 1984 — created a financial crunch that left many producers unable to pay for high-priced land they had purchased in the 1970s and early 1980s.

“By the 1980s, farmland had become a loser,” said Rutledge. “It served to drive land values down, and they stayed down most of the 1980s. It forced some Farm Credit System institutions into bankruptcy. Commercial lenders sought other opportunities for their money.”

When Rutledge and his partners started Rutledge Investment Co. in 1989, “there was very little competition among mortgage lenders to finance farmland purchases. Now money for financing is abundant.”

Five years ago, he said, it might take a farmer three to six to nine months to sell a farm. “Today, the average is about one month. If it takes four to five months, the land is probably overpriced.”

Who's doing the buying?

“Typically, it's a neighbor,” says Rutledge. “There is a huge demand to increase the size of farms today to take advantage of increased operating efficiency and reduced input costs.”

Overseas buyers are purchasing U.S. farmland, though not at the pace they did in the 1970s when some states passed laws prohibiting foreign ownership of agricultural land. “Today, those doing most of the buying are those who have owned land in the United States for several years,” he noted.

The newest category is that of the recreational buyer who is looking for a place to hunt and fish. And the biggest demand is for land where hunters can find mallard ducks and white-tail deer.

“Ten years ago that swag in a field on the back side of the farm that never drained properly was a liability,” said Rutledge. “Today, that duck hole is worth as much as any other part of the farm.”

Rutledge sees no reason to believe the trend toward increased demand for farmland will change anytime soon. “It's true that commodity prices could be higher, but the economy appears safe and interest rates remain low, two factors that are important for the buying environment.”

The primary driver for now will be the move to bigger and bigger farms. “I think the concept of the family farm that most people have has become outdated. Instead of this bucolic scene from the Waltons that many picture, more and more farmers live in town and the family eats at Wendy's.”

The only exception to the move to bigger farms he sees is on some of the “mega-farms” such as the Chicago Mill and Lumber Co. and Deltic Farms operations in Louisiana. “As control of these farms moves to members of the second and third generations, many of whom have no interest in farming, those farms are breaking up,” he noted.

The increased emphasis on conservation in farm programs is also creating changes.

“As you drive through the Delta, you see more and more land in the Conservation Reserve and Wetlands Reserve programs,” he said. “Much of this change is permanent because once the land is in the CRP, it's difficult to go back to farming it.

“I think the Delta is going to look very different 25 years from now than it does today.”